Ethical Spillovers in Firms: Evidence from Vehicle Emissions Testing Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130, pierce@olin.wustl.edu Anderson School of Management, University of California, Los Angeles, California 90095, jason.snyder@anderson.ucla.edu

Lamar Pierce Jason Snyder

I

n this paper, we explore how organizations inﬂuence the unethical behavior of their employees. Using a unique data set of over three million vehicle emissions tests, we ﬁnd strong evidence of ethical spillovers from ﬁrms to individuals. When inspectors work across different organizations, they adjust the rate at which they pass vehicles to the norms of those with whom they work. These spillovers are strongest at large facilities and corporate chains, and weakest for the large-volume inspectors. These results are consistent with the economics literature on productivity spillovers from organizations and peers and suggest that managers can inﬂuence the ethics of employee behavior through both formal norms and incentives. The results also suggest that employees have persistent ethics that limit the magnitude of this inﬂuence. These results imply that if ethical conformity is important to the ﬁnancial and legal health of the organization, managers must be vigilant in their hiring, training, and monitoring to ensure that employee behavior is consistent with ﬁrm objectives. Key words: peer effects; spillovers; fraud; corruption; productivity; ethics History: Accepted by Olav Sorenson, organizations and social networks; received May 16, 2007. This paper was with the authors 9 1 months for 2 revisions. Published online in Articles in Advance October 10, 2008. 2

The inﬂuence of organizations on individual behavior has been broadly studied in the economics, sociology, and management literatures. Both theoretical work and empirical research have examined how organizations inﬂuence the behavior of individual workers through incentives, monitoring, acculturation, and training. The economics and economic sociology literatures have focused primarily on understanding how organizations inﬂuence the productivity of individuals as they move across ﬁrms (Long and McGinnis 1981, Almeida and Kogut 1990, Song et al. 2003), contract with multiple ﬁrms (Huckman and Pisano 2006), or interact with peers (Jones 1990, Kandel and Lazear 1992, Hamilton et al. 2003, Castilla 2005, Mas and Moretti 2008). Yet this literature has failed to examine how organizations inﬂuence the ethics of individual behavior.1 Instead, this topic has been addressed primarily by the business ethics literature through experimental, descriptive, and self-reported data on attitudes, beliefs, and behavior (Sparks and Hunt 1 The productivity spillovers observed in Mas and Moretti (2008) involve effort as does the shirking observed in Ichino and Maggi (2000). This shirking, at its nadir, might be considered by some to be “unethical.”

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Introduction

1998, Weaver and Trevino 1999, Greenberg 2002).2 Results from this literature are mixed (O’Fallon and Butterﬁeld 2005), undoubtedly due to the inherent problems in self reports (Schwarz 1999, Bertrand and Mullainathan 2001) and unobservable heterogeneity across individuals and organizations. Although the economics literature has worked on identifying systematic fraud (Jacob and Levitt 2003, Wolfers 2006, Bertrand et al. 2007), economists have not attempted to measure how the fraudulent behavior of individuals changes with their transfer from one organization to another. This question is particularly interesting in a ﬁrm setting because unethical behavior may be deeply inﬂuenced by organizational context, in the form of incentives, rules, and culture of the workplace (Tirole 1996, Comer 1998, Ashforth and Anand 2003). Ethical...

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